8/26/2009 @ 6:00PM

When A Credit Union Beats A Bank

New college students have a lot of decisions to make when it comes to managing their finances. First on the list: where to open their first bank account. While big-name commercial banks like
Bank of America
are more familiar, it pays to check out the university’s not-for-profit credit union–if it has one–first. It may offer lower costs and better services.

Never heard of a credit union? It’s a financial cooperative whose members have something in common–in this case, university affiliation. Compared to commercial banks, credit unions usually have fewer branches and fewer ATMs. But what you give up in convenience, you get back in lower fees and better rates.

There are about 600 credit unions at either educational or health institutions, according to the Credit Union National Association. At Princeton University, the Princeton Federal Credit Union offers students a checking account with no minimum balances, no monthly service charge and free checks. Try getting that from a for-profit bank.

What if you need cash from an ATM and you’re not on campus? Most credit unions belong to national networks–called shared networks–of credit unions, where you can get cash without paying a fee. One of the largest shared networks is the Co-Op Network, which allows users to make deposits and withdrawals surcharge free from 28,000 ATMs across the country. If you can’t find an ATM in your credit union’s network, you can access commercial networks like Stars, though you’ll be stuck paying a fee.

Judy Gernhart, business development specialist at the Princeton credit union, emphasizes that credit unions are not-for-profit institutions whose earnings are returned to members in the form of lower fees, higher rates paid on savings deposits and lower rates charged on loans.

In addition to generally lower costs, university credit unions often cater specifically to student customers. Joyce Banish, vice president of university and community public relations at Michigan State University Federal Credit Union, says the coop aims to help students build a strong credit record.

Consequently, the credit union will sometimes waive fees for students who have a reasonable excuse for paying credit card bills. The cooperative will also wait until seven days after a bill’s printed due date before it charges late fees because it understands students are “new at managing their finances,” Banish says. “We know that students are busy sometimes … and we’re willing to give them a break.”

Credit unions may also emphasize education. The University of Nebraska Federal Credit Union offers seminars throughout the year on topics like choosing a credit card and maintaining a good credit score. “One advantage that credit unions have had over the years is that they’ve always targeted a specific group,” Banish says. “We know the students, and we know what they need and how they need it.” That expertise, however, does come with some downsides, especially if a student relies on regular electronic money transfers from his or her parents.

William Jordan, president of The Sentinel Group and a personal money advisor, recommends that incoming students open accounts at both their university’s credit union and a commercial bank. That way, parents can transfer funds to a student’s commercial bank account easily without much processing time. A money transfer to a credit union typically takes about three days to clear, according to the Credit Union National Association.

Upon graduation, students should close their accounts with the commercial bank and continue working with the credit union, Jordan suggests. A few years of loyalty to a national bank does not generate quite the same benefits as membership in a credit union, he says. Members of credit unions can often receive better interest rates for car loans or mortgages than available from commercial banks.

Megan Collins, a rising senior at the University of Nebraska, says she has “never once” considered opening an account at a large national bank in the area. Not only does the credit union offer higher savings rates and accessibility at shared branch credit unions across the country, but the union has a more personal approach. “I feel like I have a more personal stake in the union, whereas if I were at a large bank, I would really have no stake at all,” says Collins, who was the first student to open an account at the University of Nebraska Federal Credit Union three years ago.

Now, she says, “I find myself explaining what a credit union is quite often … It’s member-owned, it’s not owned by a company, somebody’s not getting rich.” “It’s just a matter of understanding not only that credit unions exist, but they exist to help people,” Collins adds.